Morning Notes — Jobs Report

The stagflation narrative gets a small boost from today’s lower than expected March Unemployment Rate ( 3.6% vs. 3.7%) as the Fed could reference the number as justification for increased rate hikes.  The Unemployment Rate isn’t the most accurate measure of labor conditions (comes from the ‘Household Survey,’ which is a statistical sample gathered by phone), but it’s an input the Fed often references in press briefings. The inflation components of today’s report (wages +0.4% and participation rate of 62.4) were both inline with expectations. The Fed has a dual mandate to manage inflation and support growth.  In the past, the Powell-led Fed has seemed more interested in policy that supports growth, because it’s never had to address elevated inflation in the past.  The Fed has recently prioritized inflation over growth, but that can change.  From an equity market perspective, the most important thing is the pace of rate hikes. Equities will likely grind higher if the pace of hikes is slow and steady.  In the 6-9 month window, ‘slow and steady’ is defined as 25bps or 50bps rate hikes at upcoming meetings.  There’s been a lot of focus on how a 50bps rate hike would likely hurt equities, but that would only take Fed funds to 1.25%.  Real rates are still negative and you need hikes totaling ~300bps before they turn positive/restrictive.  The risk to equity markets would be a one time rate hike that flips real yields into positive territory, something like 300bps at once.